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Business forecasting methods attempt to create future projections that affect business costs and revenue. Forecasting is based on a range of variables, such as production, sales and materials. Trend analysis methods use a company’s past performance as the primary measure for future projections. There are dangers in using only trend analysis in forecasting.

Trend Forecasting

Product sales, consumer demand and interest rate changes are some of the areas where managers use trend forecasting to determine future profits or losses made by a company. A trend forecast calculates past performance based on a time series that maps specific points within a past trend. Trend forecasting may examine one or more areas, or variables, at a time. When more than one variable is involved, the use of cause and effect factors can help better determine the likelihood of future performance. For example, determining product sales trends in relation to consumer demand and interest rate trends can provide a more accurate indicator of future performance than focusing solely on product sales trends.

Information Gathering

Business forecasting methods rely on information-gathering activities related to the product or issue at hand. When used for the purpose of trend analysis, the type of information gathered determines the accuracy of any future performance forecasts. The danger of using trend analysis as the sole measure for future performance occurs when managers base their decision on the wrong types of information. For example, a construction contractor may base the likelihood of increases in business activity on past home sales trends instead of on areas directly related to his business, such as the number of new building permits or the number of new homes constructed in an area.

Error Estimates

The likelihood of errors in forecasting future performance represents one of the dangers of using trend analysis as the only predictor in forecasting. To decrease error levels, managers incorporate error estimates into any forecasting data obtained. Error estimates appear as percentages or minimum and maximum error ranges. These estimates are based on fluctuations in past performance and averages gleaned from past data. Errors in forecasting become even more so likely when forecasting for a single item, such as a product, versus a group of items or products. The forecast for a group of items automatically incorporates the high and low performers and averages them out. Single items, or variables, provide only one set of data, so the likelihood of errors increases.

Market Changes

Changes in the economic market can have a significant bearing on how well a business performs during specific periods of time. Future market conditions are subject to economic and political forces on a global scale, and unknown future market changes adds to the danger of using only trend analysis as a forecasting measure. As a sole forecasting method, trend analysis can only incorporate market fluctuations from past periods, which may or may not resemble market conditions at a future date.

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About the Author

Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.

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Jeanty, Jacquelyn. "Dangers in Using Only Trend Analysis in Forecasting." Small Business - Chron.com, http://smallbusiness.chron.com/dangers-using-only-trend-analysis-forecasting-37447.html. Accessed 14 September 2019.

Jeanty, Jacquelyn. (n.d.). Dangers in Using Only Trend Analysis in Forecasting. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/dangers-using-only-trend-analysis-forecasting-37447.html

Jeanty, Jacquelyn. "Dangers in Using Only Trend Analysis in Forecasting" accessed September 14, 2019. http://smallbusiness.chron.com/dangers-using-only-trend-analysis-forecasting-37447.html

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